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Understanding the Tax Implications of Awards and Settlements: Justin Baldoni vs Blake Lively
When it comes to figuring out if awards and settlements are taxable, we can split them into two main groups: physical injuries and non-physical injuries. Within these groups, there are usually three types of claims: actual damages, emotional distress damages, and punitive damages.
Before August 21, 1996, the tax code didn’t mention “physical” in relation to personal injuries or sickness. But then it was updated to exclude from gross income any damages received for personal physical injuries or sickness, except for punitive damages. So, if you get compensatory damages, including lost wages, for a physical injury, they’re not taxable.
On the other hand, damages for non-physical injuries like emotional distress, defamation, and humiliation are generally taxable but aren’t subject to Federal employment taxes. Emotional distress recovery must be linked to physical injuries or sickness unless it’s for actual medical expenses related to emotional distress that wasn’t previously deducted.
After the 1996 amendment, mental and emotional distress from non-physical injuries are only excludable from gross income if they’re due to physical injury or sickness. Punitive damages aren’t excludable, except in wrongful death cases where state law only provides for punitive damages.
Employment-related lawsuits, like wrongful discharge or contract breaches, can result in damages for economic loss, which aren’t excludable from gross income unless caused by a physical injury. Discrimination suits can generate various awards, none of which are excludable under the tax code.
Generally, dismissal pay, severance pay, or other payments for involuntary termination are considered wages for federal employment tax purposes. Payments made on behalf of a claimant are subject to information reporting requirements, so defendants or insurance companies issuing settlement payments must issue a Form 1099 unless the settlement qualifies for a tax exception.
Sometimes, a tax provision in the settlement agreement can result in payments being excluded from taxable income. The IRS usually respects the intent of the parties. If the agreement is silent on taxability, the IRS will look at the payor’s intent to determine reporting requirements.
When it comes to payments to attorneys, the tax code states that when a payor makes a payment to an attorney for an award of attorney’s fees in a settlement, the payor must report the attorney’s fees on separate information returns with both the attorney and the plaintiff as payees. So, Forms 1099-MISC and W-2 must be filed and furnished to both the plaintiff and the attorney when attorney’s fees are paid as part of a settlement agreement.
Exposing Cheating in Federal Child Nutritional Aid Programs
Few things are as evil as exploiting programs meant for children.
Let’s talk about some people who did just that:
A Chaska resident has pleaded guilty for his involvement in a $250 million fraud scheme. The scheme exploited a federally-funded child nutrition program during the COVID-19 pandemic.
According to court documents, from approximately November 2020 through January 2022, Mohamed Muse Noor, also known as “Deeq Darajo,” knowingly participated in a scheme to defraud a federal child nutrition program designed to provide free meals to children in need. Rather than feeding children, Noor and his co-defendants took advantage of the COVID-19 pandemic—and its impact on program regulations—to misappropriate millions of dollars in federal child nutrition program funds for personal gain.
Court documents indicate that Noor was specifically recruited for the Feeding Our Future scheme despite lacking background or experience in food procurement or distribution. In December 2020, Noor submitted his application to be enrolled in the Federal Child Nutrition Program through Feeding Our Future employee Abdikerm Eidleh, directed by Aimee Bock, the former Executive Director of the Feeding Our Future non-profit organization. Under Eidleh’s guidance, Noor signed forms with falsified meal counts and fabricated invoices, falsely claiming to feed supper and snacks to 1,500 children daily within weeks of being sponsored by Feeding Our Future. However, Noor did not personally serve any meals to these children and never visited the sites registered in his name by Feeding Our Future.
As detailed in the plea agreement, Noor paid kickbacks to Eidleh in exchange for Feeding Our Future’s sponsorship in the Federal Child Nutrition Program. Food distribution sites associated with Noor fraudulently obtained up to $1.3 million in federal child nutrition program funds by falsely claiming to have served meals to thousands of children per day. Almost all of this $1.3 million was either transferred to Eidleh or intercepted by Eidleh without Noor’s knowledge. As part of their arrangement, Noor retained approximately $52,388 in fraudulent proceeds for himself.
Noor pleaded guilty to one count of conspiracy to commit wire fraud.
Stories like these show us how important it is to closely monitor funds meant for children.
Stacie's Tax Stuff 